Fundraising & Deal

Term Sheet (SAFE / Convertible Note)

This template covers the two convertible structures that work in India: a compulsorily convertible preference share issued on SAFE-like terms (often marketed as an iSAFE), and a convertible note issued by a DPIIT-recognised startup. Choose one at Clause 1 and delete the other. A United States-style SAFE is not a recognised instrument under Indian company law or FEMA and should not be used without adaptation — see the notes.

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Term Sheet

Convertible Instrument — [COMPANY NAME]

Item	Terms
Company	[COMPANY NAME], CIN [CIN], registered office at [ADDRESS]
DPIIT recognition	[RECOGNITION NUMBER AND DATE] (required if a convertible note is used)
Founders	[NAMES]
Investor(s)	[NAMES]
Date	[DATE]
Expiry	Lapses if not signed by [DATE]

1. Instrument

1.1Option A — Compulsorily Convertible Preference Shares. The Investor shall subscribe to [NUMBER] compulsorily convertible preference shares of face value ₹ [FACE VALUE] each at an issue price of ₹ [PRICE] each, aggregating ₹ [AMOUNT]. The CCPS shall carry a nominal preferential dividend of [0.001] per cent per annum, shall convert on the terms in Clause 3, and shall in any event convert no later than [NUMBER] years from allotment.

1.2Option B — Convertible Note. The Investor shall subscribe to a convertible note of principal amount ₹ [AMOUNT], being not less than ₹ 25,00,000 in a single tranche, issued by the Company as a DPIIT-recognised startup. The note shall carry simple interest at [RATE] per cent per annum (a commercial decision — many Indian notes carry a nominal or nil rate; interest, if any, accrues and converts rather than being paid), shall convert on the terms in Clause 3, and shall convert into or be repaid within [NUMBER] years from the date of issue, not exceeding the maximum period permitted under the Companies (Acceptance of Deposits) Rules, 2014.

1.3Aggregate round. The Company may issue further instruments on substantially the same terms up to an aggregate of ₹ [ROUND CAP]. Instruments issued after the date of this term sheet on terms more favourable to any investor shall be offered to the Investor on those terms.

1.4Security and ranking. The instrument is unsecured. On a Liquidation Event before conversion, the Investor shall rank [ahead of the Equity Shares / as an unsecured creditor in the case of a note] and shall be entitled to the greater of the amount invested and the amount receivable on conversion at the Valuation Cap.

2. Economics

3. Conversion

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Notes for use

These notes accompany the template and explain the drafting choices, the compliance points and the mistakes most often made with this document. They appear as a final page in the Word file, intended to be deleted before the document is executed.

A United States SAFE does not work in India as drafted

A SAFE is neither a share nor a debenture nor a deposit under Indian law. Money received against an instrument that is not a recognised security sits awkwardly: from a resident it risks being characterised as a deposit under Sections 73 to 76 of the Companies Act, 2013, and from a non-resident it risks being treated as an external commercial borrowing, since it is not an equity instrument under the NDI Rules. The two workable routes are a compulsorily convertible preference share issued on SAFE-like economics, or, for a DPIIT-recognised startup, a convertible note. Instruments marketed as an iSAFE are almost always CCPS with a cap and a discount.

Convertible note conditions

A convertible note is exempt from the deposit rules only if the amount received from a person in a single tranche is not less than ₹ 25 lakh and the note converts into equity shares or is repaid within the maximum period prescribed. That period was originally five years and was extended to ten. Older commentary still cites five years, so confirm the position in the Rules as they stand on the date of issue rather than relying on secondary sources. The issuer must be a DPIIT-recognised startup; a company that is not recognised cannot use this route at all.

Non-resident investors in notes

Where the noteholder is a person resident outside India, the additional conditions are that the startup is DPIIT-recognised, the sector permits foreign investment under the automatic route, the minimum of ₹ 25 lakh per tranche is met, Form CN is filed with the authorised dealer bank within 30 days of issue, and conversion complies with the FEMA pricing floor with Form FC-GPR filed within 30 days of allotment. A note that is neither converted nor repaid within the permitted period is a FEMA contravention requiring compounding.

The pricing floor breaks the cap

This is the most common structural failure in Indian convertible rounds. A valuation cap set low relative to the next round produces a conversion price that may fall below the fair market value certified at the time of conversion. For a resident investor that is not a problem. For a non-resident it is: the conversion cannot lawfully happen at that price. Clause 3.7 makes the floor explicit. Raise it with counsel at the term sheet stage, not at conversion, when the round is closing and there is no time to restructure.

Face value floor

Shares cannot be issued at a discount to face value. Companies with a ₹ 10 face value and an aggressive cap can find the formula producing a sub-₹ 10 price. Keeping the face value at ₹ 1 at incorporation avoids the problem entirely and costs nothing.

Angel tax no longer bites

Section 56(2)(viib) of the Income-tax Act, 1961 was omitted with effect from assessment year 2025-26 and has not been carried into the Income-tax Act, 2025. Conversion at a price below the then fair market value no longer creates a tax charge in the Company’s hands. Investors converting at a discount should still consider their own position, and a defensible valuation record remains worth keeping.

Cap and discount interact, they do not stack

The Investor takes the lower of the two prices, not both. Investors occasionally ask for the cap price less the discount. That is a materially different deal. Say which applies in Clause 3.2 and run the worked example with the actual numbers before signing.

Fully diluted, and what is in it

Whether the unallocated option pool and the other convertible instruments count in the denominator when applying the cap changes the conversion price significantly. Clause 3.2(a) resolves it one way; investors will often push the other way. Whichever is agreed, define it in one sentence and do not leave it to the definitive documents.

Most favoured nation

On a rolling convertible round, later investors frequently negotiate a lower cap. An MFN clause protects the early investor and is cheap for the Company to give. It also disciplines the Company against quietly improving terms mid-round.

Interest on notes

Interest, if charged, is taxable in the investor’s hands and attracts tax deduction at source under the withholding provisions of the Income-tax Act, 2025, which consolidated the former 194-series into a single section with effect from 1 April 2026. Many Indian notes carry nil or nominal interest precisely to avoid this. If interest accrues and converts, deal with the withholding position expressly.

Stamp duty

Duty on issue of securities is charged at 0.005 per cent under the Indian Stamp Act, 1899 as amended, collected through the depository or registrar where the securities are dematerialised. The note or subscription agreement itself attracts State-specific duty — check the article for an agreement or a bond, as applicable, in the State of execution.

Current as of

Reflects Indian law current as of {{DATE OF USE}}. The deposit rules, the NDI Rules and DPIIT recognition criteria all change — verify before issue and have the definitive instrument drafted by counsel.

This is a ready-to-use template provided for convenience. Laws and requirements change, and every situation is different — please have it reviewed by a qualified professional (a lawyer, company secretary, or chartered accountant as relevant) before you rely on it.